J '7 7& 






OUR FINANCIAL 
UPH EAVALS 

THEIR CAUSE AND CURE 

"By J. SELWIN TAIT 



PR ICE 50 CENTS 



LR3KARY of CONGRESS I 
Two Cooies ReceJ' 
MAY 31 i9Qf 
. Copyright Etfry 

QlASZtfCL XXC., No. i 



Copyright, 1907, 
By J. SELWIN TAIT. 



PRESS OF 

Byron S. Adams, 
Washington, D. C. 



Our Financial Upheavals 
their cause and cure 

By J. Selzvin Tait. 



INTRODUCTORY. 



THE RECENT CRISIS: CONTRIBUTORY CAUSES. 

THERE were undoubtedly many causes which 
contributed to the recent serious slump in 
prices and the resultant crisis, such as the 
sending out of the country of large sums 
of money in the various enterprises in 
which our people are engaged, the increasing volume 
of the country's business which called for all the 
capital it could spare and more, the issuing of huge 
loans which compelled the setting aside of large re- 
serves in connection with the bank deposits which they 
represented, the strain of the long continued investiga- 
tions rendered necessary by public dissatisfaction with 
the condition of many of our corporations, overspecu- 
lation and inflation of the worst kind, and a number 
of minor influences. These were all contributory, as 
stated, but none, nor all of them combined, could have 
left the market in such an unsatisfactory shape, or have 
brought on such a crisis at this juncture, if the coun- 
try's corporations had been founded on a sound basis 
and had thereby earned the full confidence of the pub- 



2 Our Financial Upheavals 

lie. A country resembles an individual insofar that 
when it has arrived at a robust maturity, as is the case 
here today, and has a good circulation and a good finan- 
cial digestion, it can throw off by force of its inherent 
powers of resistance all ordinary ills of a milder char- 
acter. 

The great trouble with the country, however, has 
been a radical unsoundness in the organization and con- 
duct of its corporations, with evil results which have 
been accentuated by an inelastic currency. 

COMPANY FORMATION IN GENERAL DISCUSSED. 

In the following paper the writer has discussed the 
railway situation, but his main object has been to inves- 
tigate the still greater question of company formation 
and management in general. The time is fast ap- 
proaching when railway corporations will bear the 
same relationship, in point of volume, to corporations 
in general that the railroad business bears to the entire 
business of the country today — that is to say, they will 
form an important part of such corporations, but their 
share in the whole will by no means be an overwhelm- 
ing one. 

The writer would like to give a commercial para- 
phrase to the adage that "A man is as old as his 
arteries," by saying, that the continuance of a country 
like our own as one of the foremost world-powers 
commercially, depends entirely upon the soundness and 
honesty with which the corporations which handle its 
commerce are organized and managed. There is a 
very suggestive analogy between the arteries of the 



Introductory 3 

human body and our corporations, and this country 
can no longer continue to flourish under present condi- 
tions than a man with decaying arteries can hope to 
long preserve his physical robustness. 

REMEDY RESTS WITH CONGRESS AND STATE 
LEGISLATURES. 

The remedy for the present unsatisfactory condition 
of the laws governing our corporations rests with the 
Houses of Congress and our various State Legisla- 
tures. These can only be influenced by the proper 
education of the public mind on the subject, and the 
creation of a healthy popular sentiment calling impera- 
tively for better laws. It is with this view that the 
writer offers this contribution by way of an invitation 
to a general discussion of the subject. 



I. PAST RAILROAD HISTORY. 



TWO CLASSES OF EARLY RAILROAD PIONEERS. 

It is not to be denied that the railroad pioneer who 
went into the wilderness and risked his capital and 
business reputation in its commercial development 
played an important part in the building up of the 
country, and that in proportion to his risks he was 
entitled to a larger profit than the man who stayed at 
home and took no risk whatever. Not only had the 
pioneer his uses — he was even necessary to the proper 
and timely development of this country, and those who 
underrate what he did, or wish to see him expelled 
from our financial system, have not, it is safe to say, 
sufficiently studied the subject. 

So it must be understood that no word uttered in 
this brochure should be taken as intended to detract 
from the value to the country of the pioneers of good 
class. From early days down to the present time they 
have rendered a service to this country which it would 
be impossible to overrate, and, considering the stu- 
pendous difficulties they had to overcome, the cour- 
age, tenacity of purpose and administrative ability 
which they displayed, and — in some instances where 
the work is still difficult — which they continue to dis- 
play, they are fully entitled to the sincere respect and 
approval of their countrymen. 

Unfortunately there have always been two classes 
of pioneers — one who was content with a moderate 



Past Railroad History 5 

profit and who ought to be reckoned among the coun- 
try's benefactors, and the other who simply appropri- 
ated everything in sight, thereby crippling the proper- 
ties he should have fostered, and doing incalculable 
injury to his country's investments. 

It would be an injustice to discourage the honest 
pioneer. The other, on the contrary, is dear at any 
price. The country is better without the man who 
cannot work without the stimulus of a colossal fortune. 
Not so much by reason of the cost of his assistance, as 
because of its financial immorality. 

PROMOTERS' METHOD WRONG IN PRINCIPLE. 

While our two classes of promoters were widely 
different in their character, it is evident in looking back 
that the methods of both were wrong in principle. 
Where a country's commerce is carried on by means 
of investments in stocks of corporations by the public, 
from which without exception these corporations de- 
rive their power, it is both rational and essential that 
such safeguards should be thrown around the issue 
of these stocks as shall make the public feel safe, or 
reasonably safe, in investing in them; also that these 
stocks should represent actual existing values, and not 
a more or less optimistic estimate of future profits, 
or, what is still worse, the fictitious value placed upon 
his property by the owner and his associate promoters. 

To issue stock for prospective profits, or for any- 
thing but cash or properly determined values, is cal- 
culated sooner or later to degrade the general quality 
of the country's corporate stocks, and to strike a vital 



6 Our Financial Upheavals 

blow at the root of its entire financial fabric — a fact 
becoming more important daily as the country depends 
in a growing ratio on corporations to transact its 
business. When our railroad stocks were first issued 
they were largely placed for sale in foreign countries, 
where no railroad stocks had ever been issued except 
for an equal amount of cash, and where such a practice 
as issuing them against future prospects had never 
been suspected. The discredit brought upon this coun- 
try when our practices were laid bare, imparted a 
shock to American credit which it took many years to 
outgrow, and which, indeed, it is extremely doubtful if 
it has even yet fully outgrown. 

A BETTER WAY TO CAPITALIZE. 

To the natural question in what other way it was 
possible ior those pioneers to have reaped the reward 
of their efforts there are no doubt several answers, 
but the one which is readiest to hand is this: Had 
the promoter been content to build his road, giving 
his financial backers bonds for its actual cost, and had 
he left the capitalization of the property to a later 
period, when the future value of the road had begun to 
be demonstrated, and when competent valuers outside 
his own interests and in no way connected with them, 
would have confirmed that demonstration, then he 
could have sold out his interests on an independent and 
legitimate valuation of his property, and the result 
would still have made him and his backers rich beyond 
the dreams of avarice and without debasing his coun- 
try's credit, while the purchasers could have organized 



Past Railroad History 7 

a corporation whose securities would have been legiti- 
mate in themselves and issued in a legitimate way. As 
it was, the pioneer-promoter frequently did his entire 
work of capitalization without supervision or outside 
valuation of any kind. Not only was there no check 
upon his operations, but he was his own appraiser and 
auditor, practically without limit as to stock-issuing 
powers, with the result that he burdened the markets 
with more or less worthless securities, which derived 
any ultimate value they had from the unparalleled 
growth of the country which could outlive and adjust 
almost any unfavorable preliminary conditions. 

It ought to have been apparent to all that no pro- 
moter of a company organized under our laws and 
sharing their fostering care and the privilege of their 
protection, should have the right to fix the value of 
the property he proposed to sell by issuing stock against 
it without restriction and without proper and inde- 
pendent valuation. 

RAILROAD METHODS FOLLOWED BY OTHER 
CORPORATIONS. 

It is, however, undoubted that those early methods 
of our railroad pioneers existed, and that they afforded 
an example that has been followed with more or less 
faithfulness by numberless promoters since that time, 
and a habit of gross over-valuation of properties by 
the vendors and consequent over-capitalization is one 
of the most pernicious customs with which our legis- 
lators and financiers have to contend at this time in 
connection with our financial methods — another being 
the habit of transacting our business in a "hole and 



8 Our Financial Upheavals 

corner" fashion instead of in the broad light of day 
as the affairs of corporations enjoying a public charter 
ought to be transacted. 

FIDUCIARY DISHONESTY AND ITS RESULTS. 

Our railroad presidents — and they are by no means 
the only offenders — instead of being the servants of 
the corporations they were employed to guard, and the 
honest fiduciaries of the valuable franchises intrusted 
to them, became in known instances financial dictators 
who withheld vital information from their stockholders 
( for their own aggrandizement, made huge fortunes for 
themselves with the special knowledge they obtained 
while acting as directors, and by the manipulation of 
their companies' accounts to suit their own purposes, 
and in the pursuit of their own interests, again and 
again brought the country to the verge of disaster. 
Their reckless and unprincipled acts have on numerous 
occasions during the last thirty years made such a 
shuttlecock of values that a considerable section of the 
investing public has withdrawn largely from railroad 
securities, of which the rising generation in no small 
degree inherits a very intelligible distrust. 

THE RESULT OF PUBLIC DISTRUST. 

Perhaps at this point it is well to inquire: What 
might be expected in a country of growing wealth in 
the case of a system of discredited standard invest- 
ments ? The natural answer would appear to be : We 
should find that there would be a disposition to seek 
other forms of investment; that is to say, that the 



Past Railroad History 9 

money which should have gone into railroad securities 
would be found to have gone conspicuously in other 
directions, and from its volume to have brought about 
certain abnormal conditions in other fields of security. 
This is absolutely what happened. Conservative men 
resorted to our savings banks and to real estate in 
overwhelming numbers, whilst speculative men went 
into mining stocks and other similar securities — hence 
the strong development of the curb-stone brokerage 
business in our great cities. 

REMARKABLE EFFECT ON OUR SAVINGS BANKS. 

Today savings bank securities and the real estate of 
our cities, owing to the demand forced upon them in 
this way, have grown to prices disproportioned to their 
values. This was inevitable. With no form of stock 
investment in sight which the small capitalist who con- 
demned our railroad methods approved, he put his 
money into one or more savings banks, where though 
the interest was moderate, he felt that the principal 
was safe. To such an extent has this been done that 
the aggregate deposits in the savings banks of New 
York State exceed those in all the savings banks of 
Great Britain, as will be seen from the following fig- 
ures of the condition of the savings banks of the two 
countries on the 31st of December last: 

Savings Bank deposits of New York 

State $1,362,035,836 

Savings Bank deposits of the United 

Kingdom 996,827,464 

$365,208,372 



io Our Financial Upheavals 

Does this mean that the Americans are a more 
thrifty people? Not at all. It indicates, as already 
stated, a defect greatly to be deplored — the absence of 
other investments in which the people have confidence. 
Does it mean, on the other hand, that England is 
growing relatively poorer? Not at all. Twenty-five 
years ago England stated that she was saving at the 
rate of $500,000,000 a year. She is certainly saving 
a great deal more now, yet all the money she has in her 
savings banks is a little less than a billion dollars — in- 
dicating a healthful outlet for her savings in other 
directions. 

EFFECT ON REAL ESTATE VALUES. 

And this is only the first of the effects produced by 
distrust in our corporations. The whole trend of the 
savings banks of today is to educate its depositors to 
the value of real estate. Savings banks themselves 
are extensively interested in realty, and when a depos- 
itor withdraws his money he follows the example of 
the bank. Thus the reprehensible methods of our cor- 
porations which have driven thrifty people away from 
their investments, have forced them to concentrate their 
attention, not only recently, but for decades, upon real 
estate, and tens of thousands of individuals — to express 
it very moderately — besides great investment corpora- 
tions without number, are interested in real estate to- 
day, who, in other countries, and here under more 
favorable circumstances would have embarked their 
money in the stocks and bonds of corporations honestly 
and profitably managed, much to the advantage of the 
corporations and to the profit of the investor. 



Past Railroad History ii 

Another curious feature of the situation is percepti- 
ble — that the absence of safe and sound investments has 
driven into the savings banks the well-to-do, and in 
many instances even the wealthy, for whom these 
banks were never designed, with the result that it is 
no uncommon thing to find in wealthy cities like New 
York a large number of people who have on deposit in 
each of the savings banks in the city the prescribed 
limit of three thousand dollars — a custom which in 
the aggregate has still further increased the demand 
for the municipal and other securities in which savings 
banks can invest, to the injury of the man of small 
means for whom savings banks were designed. 

Turning to the reverse side of the shield, we find 
that the force of competition for real estate, engendered 
in the way described, has driven the price of realty in 
our cities to such figures that the rents are out of all 
proportion to what they are in more thickly populated 
European countries. In cities like New York this con- 
dition of affairs is practically destroying the possibility 
of a home for the individual of small or even moderate 
means, who, with like income abroad could have a 
house of his own. The overflowing tenements, the 
only less crowded flats, the higher rent for that which 
is not a home in the old time acceptance of the term, 
is the result of and is directly traceable to our dishonest 
corporate management, and another result is the starva- 
tion of enterprises of national importance by reason of 
the lack of funds estranged from them in this manner. 
These fruits of the policy of watering stock will show 
that we cannot commit a financial heresy of the kind 
without affecting most seriously all classes of our 
people. 



12 Our Financial Upheavals 

BAD EFFECT ON FOREIGN CAPITAL. 

The practice of depreciating our principal securities 
in the way described has had another effect — it has 
frightened foreign capital from our shores. Had our 
railroad enterprises been honestly organized and man- 
aged from the outset, it is beyond all question safe to 
say that this country could have had foreign capital 
practically without end for the development of its en- 
terprises. Upwards of twenty years ago the writer 
pointed out that it would pay many British investors, 
subject to the keen competition of this country, to go 
out of business altogether, and to invest their large 
capital in American securities. The result would have 
been that we would have enriched our best customers, 
who would have utilized their dividends in buying our 
goods, so that we would have had the benefit of foreign 
capital at a time when it was as necessary as life-blood 
is to the physical body, and the profits earned by it 
would have been practically as valuable as if in the 
hands of domestic lenders. This too may be pointed 
out : That the policy which attracts foreign capital to 
our shores in huge quantity, is as instrumental in knit- 
ting the bonds of international friendship as the best 
argument of the Peace Congress. No nation likes to 
fight its own capital in the hands of another country. 
Invested capital is assuredly one of the ties that bind. 
It creates a condition of comity and even friendship 
between nations. It is one of the best guarantors of 
international peace. Again and again during the last 
three decades has it happened that foreign countries 
attracted by our magnificent opportunities have poured 



Past Railroad History 13 

their wealth into our laps, only to be obliged to snatch 
it back at a ruinous loss in the excitement of exchanges 
convulsed by some fresh revelation of wholesale fraud- 
ulent mismanagement. The pity of it! Such a 
slaughter of geese that laid golden eggs ! Do the same 
practices prevail elsewhere? Fiduciary immorality is 
for the most part unknown in the leading financial 
centers of Europe. They may have other sins to an- 
swer for, but not the national sin which distinguishes 
us as a country. 

Until checked by the Companies' Acts Great Britain 
suffered much from the greed and unscrupulousness of 
the London promoter, who in a great many instances 
was grasping and unprincipled almost beyond belief, 
but he was always more or less under suspicion, and 
all the injury he could do was done prior to the com- 
pleting of the organization of the corporation, whereas 
in the United States irregular incorporating has been 
too frequently followed by the dishonest management 
of the corporation itself by its own trusted officials. 

WONDERFUL SHOWING OF BRITISH CORPORATIONS. 

Some years ago the writer had occasion to extract 
from the London Statist particulars of a year's work- 
ing of three groups of corporations representing as 
many different kinds of investments. One of these 
groups embraced trading corporations, another manu- 
facturing corporations. Two of the groups had a 
total capital of $612,000,000, on which the average 
dividend paid was eight per cent per annum ; the capital 
of the other group was not stated, but it embraced 418 



14 Our Financial Upheavals 

corporations and the dividend averaged over eight per 
cent per annum. Those particulars were taken hap- 
hazard out of a leading English financial paper, and 
the capital referred to is but a small percentage of what 
is invested in British trading and manufacturing com- 
panies. 

In a recent number of a leading London financial 
paper the writer notices that all the corporations en- 
gaged in one particular branch of manufacture with an 
aggregate capital of $117,000,000, earn a little over ten 
per cent in the way of profits, the number of corpora- 
tions being seventy-eight; and that the great London 
incorporated retail trading stores — 11 in number — pay 
an average dividend of a little over 12 per cent — the 
only wholesale house mentioned paying 20 per cent. 
At the same time a list of fifteen of the great London 
banks representing with their branches over two thou- 
sand banking offices, pay an average dividend of 15 
per cent. These are not selected examples, but simply 
represent such particulars as are readily at hand and 
are evidence that the figures of former years already 
referred to are fully maintained. 

If the British public were not satisfied with the re- 
sult of their investments in corporations in the past, 
the issue of new capital would languish. Instead of 
this being the case, however, it is found that the new 
capital applications for the first quarter of 1907 
amount to $247,000,000, which is considerably above 
the average of recent years. The bulk of the subscrip- 
tions to such companies comes from the profits made 
in other corporations and in this way the money made 
in the industrial business of the country is turned back 



Past Railroad History 15 

again into commerce to add still further to the pros- 
perity of the country. 

IMPROPER INCORPORATION METHODS VERY 
INJURIOUS TO COUNTRY. 

Is it conceivable that money would go into savings 
banks or real estate in its present proportions if there 
was as wide a selection of good investment stocks 
in this country as there is in the United Kingdom ? 
And is it proper that the profits made out of a coun- 
try's trade instead of being turned back into it to fruc- 
tify as liquid capital, should be withdrawn from our 
commerce and sunk in permanent investment like real 
estate? It is a national loss to an expanding country 
like the United States, which needs every cent of the 
money it can get to develop its commerce to have so 
large a proportion of its working capital withdrawn in 
this way, instead of being reinvested in it and further 
adding to the country's wealth. The money invested 
in railroad bonds and railroad stocks is directly use- 
ful in extending the country's commerce. Can the 
same be said of real estate investments? 



II. PRESENT CONDITIONS. 



DISCREDITED SECURITIES. 

The situation today in this country is as follows : 
Many of our railroad securities are discredited and it 
is impossible to obtain the funds for the development of 
the roads which is made vitally necessary by the rapid 
expansion of the country's commerce. Simultaneously, 
a vast number of other enterprises, copying the meth- 
ods adopted by the railroad companies have fallen into 
disrepute, and it is evident that in order to give the 
public full confidence in our legitimate corporate en- 
terprises, such legal safeguards will have to be thrown 
around all of them, and not around railroad securities 
only, as will serve to protect the public, which neither 
in this country nor anywhere else, has ever been able 
to protect itself. 

"THE COMPANIES' ACTS" OF GREAT BRITAIN 
FOR PERUSAL. 

In suggesting at this juncture that The Companies' 
Acts of Great Britain will well repay perusal, as an 
evidence of what has been done in that country to pro- 
tect corporate interests, the writer does not wish to be 
considered as unduly exalting English methods over 
others. That country has faults of her own to answer 



Present Conditions 17 

for, but whatever her shortcomings may be along other 
lines, she cannot as a nation be charged with fiduciary 
dishonesty in the management of her corporations, nor 
can she be charged with neglect in framing laws to 
protect her stockholders during or subsequent to incor- 
poration, or in laxity on the part of her courts to en- 
force these laws. England, it will be remembered, is a 
nation of stockholders, and it was a task requiring 
great delicacy of treatment as well as sound judgment 
and experience to frame laws which while protecting 
the investor — in many instances against his own cupid- 
ity and folly — should not retard the country's proper 
development by harassing legislation. 

Even the London promoter or organizer of corpora- 
tions, unscrupulous though he has been in the past, 
had his uses — his vast uses — and so important were 
these that it has been the chief difficulty of the Govern- 
ment of Great Britain for the past half century in 
dealing with these matters to avoid putting him out 
of business, while at the same time safeguarding the 
interests of the stockholders by protecting them 
against the wiles of unscrupulous members of his craft. 
England recognized, too, that in indiscriminate legis- 
lation an honest man is very much more likely to be 
harassed than a rogue, who lacks the reverence and 
fear of the law which the other has, and no nation has 
been more careful in its avoidance of oppressive legis- 
lation toward those mixed instrumentalities which go 
to build up the commerce of the country. The figures 
given elsewhere show how well it has paid to exercise 
such care. 



18 Our .Financial Upheavals 

HISTORY OF INCORPORATING IN GREAT BRITAIN. 

Prior to 1862 British corporations were simply un- 
limited partnerships. During that year the Limited 
Liability Act was passed, which limited the liability 
of the stockholder to the face value of his stock. The 
passage of that Act gave to that country its greatest 
impulse in company formation. In the vast number 
of companies formed were many of worthless char- 
acter, and England recognized at the outset the inabil- 
ity of the ordinary investor to protect himself in the 
face of this greater license in corporate matters, and 
made his protection her most careful study, and the 
highest legal talent the country possesses has during 
the past forty -five years engaged itself in adjusting 
this subject, with the result that the London Times, 
in a recent issue, was able to point with pride to the 
fact that of the 40,000 companies which have their 
registered offices in England, the great majority are 
honest concerns. As a standard of corporate honesty 
which meets the approval of the London Times is by 
no means a low one, there is no doubt that the tribute 
paid to English corporations is in reality a very high 
one, and that it is the direct result of the ceaseless 
efforts made by the Government to protect the invest- 
ing public. 

PROVISIONS OF "THE COMPANIES' ACTS." 

Among the numerous provisions and amendments of 
The Companies' Acts for the incorporation, regulation 
and winding up of trading companies and other asso- 
ciations, are the following: 



Present Conditions 19 

1. The Act is not local only, it covers England, 
Scotland and Ireland. It provides that no company, 
association, or partnership having for its object the 
acquisition of gain, shall be formed unless it is regis- 
tered as a company under this Act, or is formed in 
pursuance of some other Act of Parliament or of Let- 
ters Patent. 

THE MEMORANDUM OF ASSOCIATION. 

A Memorandum of Association usually supple- 
mented by Articles of Association shall be filed with 
the Registrar of Joint Stock Companies. These shall 
describe the full intent and purpose of the company, 
shall contain precise particulars of any allotment of 
stock for a consideration other than cash, of any con- 
tracts of sale, or of services or other consideration in 
respect of which said allotment was made, and shall 
furnish all desirable information in connection with 
these matters. When the memorandum is filed and a 
certificate of incorporation given by the Registrar that 
shall be conclusive evidence that all the requisitions of 
The Companies' Acts have been complied with. A 
copy of the memorandum with the Articles of Asso- 
ciation shall be forwarded to every member at his re- 
quest on payment of the nominal fee of one shilling. 

2. The papers filed with the Registrar shall state, 
among other things, the amount to be offered for 
public subscription, the amount to be subscribed and 
paid in, also the minimum amount upon which the com- 
pany will proceed to allotment — 5 per cent upon the 
amount subscribed being the smallest amount payable. 
If the minimum amount stated has not been subscribed 



20 Our Financial Upheavals 

at the expiration of forty days, all money received from 
applicants for shares shall be forthwith repaid to the 
applicants. There is a heavy penalty if the repayment 
is not made within forty-eight days. 

3. Mortgages and charges shall be void against li- 
quidators or creditors unless filed with Registrar for 
registration within twenty-one days of their creation. 
Such registry of mortgage shall be open to the public 
for inspection of any person on payment of a purely 
nominal fee of not exceeding one shilling for each in- 
spection. A copy of such mortgage shall be kept for 
inspection of members or creditors. 

THE PROSPECTUS. 

4. A prospectus is issued by every company. It 
means any prospectus, notice, circular or other invita- 
tion or offer to public subscription of any shares of a 
company. Like the Articles of Association it must be 
dated and signed. It must state the amount of the 
minimum subscription in which the directors will pro- 
ceed to allotment, and also the amount payable on 
application. In addition to a proper description of 
any property purchased, it must state the names and 
addresses of the vendors of any property purchased or 
acquired by the company, or proposed so to be pur- 
chased or acquired, which is to be paid ,for wholly or 
partly out of the proceeds of the issue offered for sub- 
scription by the prospectus. Any commission paid for 
subscriptions must be authorized in the Articles of As- 
sociation and disclosed in the prospectus. If no mini- 
mum amount of subscription has been fixed in the 
Memorandum of Articles of Association, or in the 



Present Conditions 21 

prospectus on which the company will proceed to allot- 
ment, then the whole amount of capital offered must 
be subscribed and the same paid on application to the 
company. 

THE RIGHT OF THE MINORITY. 

5. The directors of a company shall on the requisi- 
tion of the holder of not less than one-tenth of the 
issued capital of the company proceed to convene an 
extraordinary general meeting of the company. The 
requisition must state the object o,f such meeting. If 
directors do not proceed to cause a meeting to be held 
within twenty-one days from date of requisition, the 
requisitioners, or a majority of them in value, may 
themselves convene the meeting. 

DIRECTOR'S LIABILITY. 

6. Under the Directors' Liability Act of 1890, which 
is construed as being one with The Companies' Acts, 
every director of the company at the time of the issue 
of the prospectus or notice, and every promoter and 
every person who has authorized the issue of the pros- 
pectus or notice, shall be liable to pay compensation to 
all persons who shall subscribe for any shares on the 
faith of such prospectus, for the loss or damage they 
may have sustained by reason of any untrue statement 
in the prospectus or notice, or in any report or memo- 
randum appearing on the face thereof, or by reference 
incorporated therein or issued therewith, unless it is 
proved that he had reasonable ground to believe that 
the statement was true, and unless he had reason to be- 



22 Our Financial Upheavals 

lieve that the untrue statement fairly represented the 
report or valuation of an engineer, valuer, accountant 
or other expert, provided that notwithstanding it was a 
fair and correct copy, such director, etc., who author- 
ized the issue of the prospectus, shall be liable to pay 
compensation if it be proved that he had no reasonable 
ground to believe that the person making the statement 
or report of valuation was competent to make it. 

THE PROMOTER CANNOT RETAIN ANY UNDISCLOSED 
PROFITS. 

7. The Promoter — the individual who forms the 
company and sets it going — now stands in a fiduciary 
relation to the company he represents and cannot retain 
any undisclosed profit. 

8. Every contract, document, or matter not speci- 
fically referred to in the prospectus, and calculated in 
any way to influence the investor's judgment, shall be 
void, nor can any compliance with this provision be 
waived. 

9. All the Directors retire at the first general meet- 
ing of stockholders. After that one-third retires an- 
nually. Only the company in general meeting can by 
special resolution remove a director before the expira- 
tion of his period of office. 

10. Directors are liable for funds improperly ap- 
plied ; if they pay dividends out of capital they may be 
liable for the whole amount so paid. 

11. Auditors are appointed by the stockholders at 
general meeting. They retire annually and are eligible 
for re-election. These auditors are the agents of 



Present Conditions 23 

the stockholders. They are furnished with a list of 
all the company's books, and to these they have access 
at all times. They are empowered to demand what- 
ever information or explanation they require of the 
directors. Once a year at least they make a careful 
examination of the accounts and vouchers, and of the 
balance sheet. The latter must comply as far as pos- 
sible with the form provided by The Companies' Acts. 

12. On reasonable complaint the Board of Trade 
may cause an examination of the company's books. 

13. If any director, officer or contributor of any 
company, destroys, mutilates, alters or falsifies any 
book, paper, writings or securities, or makes or is 
privy to such, he is guilty o,f a misdemeanor and liable 
to imprisonment for two years. 

LIST OF STOCKHOLDERS ALWAYS ACCESSIBLE. 

14. A register of members showing the names and 
the numbers of shares held by each must be kept at the 
registered office of the company, where it must be 
open daily for the inspection of any member gratis, 
and of any other person upon payment of the nominal 
fee of one shilling. Copies of such register can be 
obtained by anyone on payment of sixpence per hun- 
dred words. There is a heavy penalty for each day of 
refusal. 

MUZZLING THE MAJORITY INTEREST. 

15. If so specified in the Articles of Association, 
every stockholder shall have one vote for every share 
up to ten, and an additional vote for every five shares 



24 Our Financial Upheavals 

beyond the first ten up to one hundred shares, and an 
additional vote for every ten shares beyond the first 
one hundred — thus the holder of ten thousand shares 
would have only 1,018 votes. 

Note. — The provisions with reference to the 
gradual retirement of directors, and which limit 
the voting power of stockholders, throw such dif- 
ficulties in the way of a sudden seizure of control 
of a company by a majority interest as to discour- 
age any effort of the kind. 

FALLACY THAT THE STOCKHOLDER CAN PROTECT 
HIMSELF. 

While certain of the conditions insisted upon in the 
Memorandum of Association and Prospectus of British 
Companies have not been overlooked by the laws of 
some of our own States, the fallacy which England ex- 
posed a half century ago that the stockholder was able 
to protect himself apparently exists here still, and it is 
the first delusion that the country should get rid of. 
The stockholder has to be protected by law from dan- 
gers arising from his own cupidity and carelessness, 
as well as from fraud on the part of promoters. Even 
where similar conditions exist there is this significant 
difference between the two countries, that here the con- 
ditions are treated academically and are apt to be 
more honored in the breach than in the observance, 
while in Great Britain those concerned are held to the 
strictest accountability, whether in the matter of the 
organization, conduct, or winding up of corporations. 
This subject is not touched upon elsewhere, but the 



Present Conditions 25 

stern injunctions of the Winding Up Acts of The Com- 
panies' Acts, will go a long way to make the officials 
of any corporation exceedingly careful in the manage- 
ment of its business and solicitous for its success. 

There are many special features in The Companies' 
Acts such as the maintenance of the rights of indivi- 
dual stockholders, and the guaranty of publicity, which 
are not included in any of our state laws, but, in addi- 
tion, the bound volume of these Acts is the long his- 
tory of the half-century battle between the law and its 
violators, and every point taken is worthy of the most 
careful consideration. 



III. THE REMEDY. 



AMENDED CORPORATION METHODS SHOULD PRE- 
CEDE IMPROVED CONDITIONS. 

(a) It seems at the present time to be a matter of 
the utmost urgency that every attempt should be made 
to create public confidence in our securities, so that the 
capital may readily be raised which American railroads 
so badly need to enable them to handle their growing 
traffic. While, however, the existence of the present 
condition is highly prejudicial to the best interests of 
the country and advantageous to those of its rivals, it 
is by no means as injurious as would be a resumption 
of the country's prosperity without the removal before- 
hand of the evils which lie at the root of the present 
system of corporate formation and management, an 
event which would be analogous to the closing of a 
dangerous wound at the surface, while it was still fes- 
tering at the bottom — a condition of danger which in- 
evitably calls for the knife later on, and under still 
less favorable conditions to avoid blood poisoning. 

The writer recognizes the difficulty in following 
English methods exactly because of the fundamental 
difference in our form of Government, but he is hope- 
ful that such a clear understanding by the public of 
the dangers of the present .faulty system of our State 
incorporation laws and methods, may be reached, as 
will greatly facilitate the necessary changes, especially 



The Remedy 27 

when the remedies indicated are simple and practical, 
and have been found entirely successful in other coun- 
tries. It is primarily to the education of the general 
public on this subject — and through that means to that 
of the State legislatures — that the country must look 
for relief from state obstruction if such occurs in face 
of the marked trend of this newer thought on corpora- 
tion matters. 

THE PRESENT AN IMPORTANT EPOCH. 

There is no disguising the fact, and the writer 
wishes to lay the greatest possible emphasis on the 
statement, that this country has now reached one of 
the most important epochs in its financial history. 
Within ten years, perhaps within half that time, there 
will not be a wheel turning on this continent which is 
not a corporation wheel, and great as are this coun- 
try's resources and opportunities, unless sane and sound 
laws are promptly enacted for the organization and 
conduct of our corporations, public confidence will be 
so impaired that every natural advantage the country 
possesses will be dissipated, and we will be kept on 
the ragged edge o,f feverish markets and bad times 
until we mend our corporate ways. 

Owing to the enormous and unprecedented develop- 
ment of railroad facilities during the past decade, and' 
to other causes, the whole world has been elevated to 
a higher plane in its commerce within that period. 
This condition of affairs will continue, but if we as a 
country are to secure our share of this new prosperity, 
we must provide ourselves with corporate equipment 



28 Our Financial Upheavals 

suitable to the work to be done. A man may be seven 
feet high and four feet across, but if he develop a 
radically weak digestion and a feeble circulation, he 
will not be as efficient a citizen as the man of half his 
size who is endowed with an unimpaired digestion and 
vigorous circulation. 

If the matter of the readjustment of our corporate 
securities on a proper basis is promptly taken in hand, 
there is no reason why the country should not quickly 
recover from its recent set back, or why its trade should 
not increase in the ratio of the past ten years. 

CURE SHOULD BE AUTOMATIC. 

It has been assumed on the part of some foreign 
writers that what the American Government now ap- 
parently contemplates, is that no domestic railway shall 
be able to create or raise capital without Government 
or Congressional sanction. This opinion the writer 
thinks arises from a misconception of the situation, as 
it would undoubtedly be better to remedy the evils com- 
plained of by enacting laws once for all for the proper 
formation, capitalization and regulation of our cor- 
porations, with the view of making the cure auto- 
matic on their part, than to force a cure by continuous 
supervision from the outside — a course which would 
saddle the Government with a grave responsibility, 
and must end disastrously because the task would be 
an impossible one. 



The Remedy 29 

A FEDERAL LAW FOR INTERSTATE CORPORATIONS; 
NO GOVERNMENT SUPERVISION. 

In the interest of the public and of corporations gen- 
erally, the writer recommends that Congress should 
enact for interstate corporations a federal law similar 
to our National Bank Act, which should include all the 
protection and privileges of that Act without Govern- 
ment supervision or responsibility. There should be 
no attempt at Government inspection. I,f the laws 
regulating the organization and management of our 
corporations are wisely enacted, the stockholder with 
his enlarged rights and powers may be trusted to do 
the rest. The trouble has been in the past that the 
stockholder has had no rights of self-protection. These 
are important points, but the efficiency and prompti- 
tude of our Courts is perhaps the most important point 
of all, in order to give effect to the remedies devised. 

FUTURE CAPITAL MUST REPRESENT CASH OR 
APPRAISED PROPERTY. 

(b) That in the future all the capital stock of a rail- 
way or other corporation should represent not future 
prospects, but cash-capital paid into the treasury, dollar 
for dollar, and expended or to be expended upon the 
property; or it should represent property certified by 
competent valuers (about whose standing and honesty 
there can be no question) to be worth at the time of 
purchase the full value paid for it in stock; also that 
a special meeting of the stockholders convened for the 
express purpose fully set forth in the call should be 
summoned whenever it is proposed to raise additional 



30 Our Financial Upheavals 

capital or to take any other action of vital interest to 
stockholders. 

(c) That the annual or semi-annual reports and bal- 
ance sheets should be in strict compliance with a form 
prescribed by law, such form to be prepared by skilled 
experts and to be very specific in its requirements. 
These should vary according to the character of the 
corporation. They should give in every case explicit 
directions as to the source and proper allocation of all 
earnings and expenditures, and should determine what 
are divisible profits and what are not. No director or 
other officer should be eligible as auditor. The auditor 
should be elected by the stockholders, and should haw 
the fullest power to examine the books at all times, 
and to call upon the president, directors, and officials 
for whatever explanation or information they may re- 
quire. Said auditors, who should be public account- 
ants of unquestioned standing, should once at least in 
every year examine the accounts and ascertain the 
correctness of the balance sheet. After examination 
of balance sheet, vouchers, books, etc., they should sign 
and present to the stockholders a statement to the ef- 
fect that they have examined these carefully, and that 
the books are properly kept, and exhibit a true and 
correct view of the company's affairs. Such statement 
should specify any cause of complaint which has come 
under their notice. 

SUGGESTS "COMPANIES' ACTS" AS BASIS. 

(d) That "The Companies' Acts" of Great Britain, 
which represent the costly experience as well as the 
wisdom of nearly half a century in regulating corpora- 



The Remedy 31 

tions, be carefully examined, and such regulations as 
are adapted to this country be considered with a view 
to adoption. 

Note. — For forty-five years the battle has raged 
between "The Companies' Acts" and the promoter 
in just the same way that it has continued between 
plate armor and rifled guns, till the promoter, ren- 
dered innocuous on the subject of prospectuses, has 
resorted to the not unknown American method of 
raising capital without prospectuses, and hence the 
new legislation introduced by the British Govern- 
ment into the House of Lords prohibiting the issue 
of capital without registration and prospectus. 

(e)That for the proper carrying out of such a law 
Congress frame certain clear directions for the treat- 
ment of accounts of railway and other corporations 
and with a view to preventing manipulation for stock- 
jobbing purposes, attaching a heavy penalty to any 
violation of the law. 

THE AUDITOR. 

Much of the value of the above recommendations 
must of course depend upon the ability and honesty of 
the auditors. Of late years the high position which 
these gentlemen occupy in other countries, has been 
recognized here, and the importance of their work is 
more fully recognized than it was formerly. In other 
countries accountants serve fully as long an apprentice- 
ship to accountancy as the law student does to law, and 
the final examination before admission is still more ex- 
haustive, for the reason that the accountant must be 
familiar with all questions of law relating to accounts. 



32 Our Financial Upheavals 

as well as with the science of accountancy. So de- 
servedly high is the standing o,f the well-known ac- 
countant firms in London that all the great capitaliza- 
tions there which frequently involves millions of 
pounds, are made solely on their reports, which are 
never questioned. 

IMPORTANCE OF ACCESS TO LISTS OF STOCK- 
HOLDERS. 

In "The Companies' Acts" perhaps no provision is 
more important than that which gives the stockholders 
access to the share registers. It is a principle of Eng- 
lish law that the creditor has a right to know who his 
debtors are, and that the stockholders have a right to 
know who their fellow stockholders are. But under- 
lying all this is the broad basic principle that a charter 
or privilege or right of incorporation granted by the 
public shall compel the transaction of the business of 
the company in the broad light of heaven. 

Where the objective point of the directors' aim is 
the securing and retaining of a majority of the stock, 
it will readily be seen that it is a matter of prime 
importance with them to conceal as far as possible 
the names and addresses of their co-partners in the 
company, and so to prevent combinations, and thus it 
is that the transfer books of a company here have 
a double value compared with what they have in Great 
Britain — for the reason that this position means fre- 
quently the ownership of the key to the situation. 

Under British law each company shall make out at 
least once in every year a list of all persons who are 



The Remedy 33 

members of the company. Such lists shall state the 
names, addresses, and occupations of all the members, 
the number of shares held by each, and the same 
particulars of those who have ceased to be members 
since the list was last made. 

Access to names and addresses of stockholders has 
indirectly a wide influence, too, in educating the pub- 
lic to the merits of corporations or joint stock enter- 
prises and in this way enabling them in a measure to 
protect themselves. 

ENGLISH METHODS. 

Bankers, promoters, and houses of issue generally, 
which are engaged in the bringing out of companies, 
follow up those published lists very closely, and there 
are many promoting firms in London today which 
have hundreds of thousands of names and addresses 
of investors corrected up to date and classified. By 
the issue of prospectuses, which is going on all the 
time, people are gradually educated in incorporation 
matters, so that they can form a fair idea for them- 
selves of the merits of the scheme before them — first, 
by the names of the .directors and officers on the 
prospectus, and then by the character, locality and 
reputation of the investment. 

In this connection it may be mentioned incidentally 
that promoters who know their business, send out a 
prospectus for the most part only to people who favor 
the kind of investment of which that prospectus treats. 
This information he gets from the lists of stockhold- 
ers. In this way the addressee, if he is sufficiently 
interested, can compare one prospectus with the other, 



34 Our Financial Upheavals 

as the bulk o,f them treat of the same kind of security. 

Everything in the prospectus has a bearing on the 
investor's judgment. For instance, the name of the 
house of issue, the names of the auditors, attorneys, 
valuers, and bankers, all are closely scrutinized and all 
have a special standing - which is known more or less to 
the intending investor. During an experience of fifty 
years the issued prospectuses have become a species 
of British literature, and as the same names appear 
again and again, they come in time to have a value 
which is known to all with a fair degree o,f accuracy. 

Notwithstanding the rigid requirements of the Eng- 
lish Companies' Acts, there is nothing really harass- 
ing or inquisitorial in their bearing upon bona fide 
corporations. If in spite of the restrictions imposed 
by the Acts named something is still possible for a 
dishonest promoter, on the other hand the directors 
and managers of the company are held to a strict ac- 
countability, and no majority can keep the minority 
from access to the books when a reasonable ground for 
inspection exists ; nor can a majority long defy a 
minority which has access to the addresses of the 
general stockholders. 

But indeed, the majority scarcely exists in Great 
Britain in the form that it is known here. The shares 
of a company offered to the public at large are widely 
subscribed and they are generally taken by from one 
to two thousand people. There are comparatively few 
large stockholders, except where the vendor of a prop- 
erty purchased has taken a block of stock in part 
payment, and in his case steps are taken to prevent that 
interest from unduly swaying the control. 



The Remedy 35 

STRIKING RESULTS OF GOOD CORPORATION 
METHODS. 

The result of this wholesale education of the people 
is that today the smallest capitalist as well as the 
largest can find to his satisfaction just the kind of 
security he wants with the further comfort of know- 
ing that his company is honestly managed. This kind 
of investment is less troublesome to him than the col- 
lection of house rents or the worry and responsibility 
of some independent business should he be disposed 
like the American citizen to embark in a trade outside 
his own. When our investments as a whole are suffi- 
ciently safeguarded, there will undoubtedly be a very 
great call for them, and if this call is responded to by 
honest houses of issue, placing sound and profitable 
investments before the public, the gain to both will be 
large. 

STATES HAVE ENRICHED THEMSELVES BY LETTING 
DOWN THE BARS. 

The hearty approval and support of the different 
states is very essential in the case of the remedies pro- 
posed. These may be difficult to obtain in some in- 
stances, for the reason that certain states have found it 
a very profitable business to attract corporations from 
other states by means o,f a degree of laxity in their 
corporation laws — a short-sighted and foolish policy. 
The Federal Government and the State Governments 
will be compelled to act together in this business, and 
to come to a common understanding. At the present 
time one of the greatest stumbling-blocks to the pub- 
licity afforded by a general meeting of the stockhold- 



36 Our Financial Upheavals 

ers is the custom of registering an incorporation — and 
so compelling the meetings to be held — in another 
State. The inconvenience this entails upon the mem- 
bers of the company to attend these meetings is largely 
prohibitory in that respect, and the general ignorance 
as to the company's affairs is fostered in this way. 

SUGGESTIONS AS TO PUBLIC UTILITIES. 

In the case of Federal, State, or Municipal utility 
corporations, it should be arranged that the public 
should never absolutely surrender its right in its own 
franchises, but should keep that right permanently 
alive; (1) By retaining the privilege of buying back 
its franchises at certain future dates at figures based 
on an agreed advance on the outlay, which while pro- 
viding a reasonable, and, where the risk is considerable, 
even a handsome return upon it, would prevent any- 
thing like the payment of an extravagant profit for the 
return of a property, which not only belongs to the 
public to begin with, but which derives all the profit 
which it makes from their custom or support; (2} or, 
by stipulating for a share in all the profits after an 
agreed return has been made to the stockholders. 

TRAFFIC IN STOCKS BY FIDUCIARIES. 

It is also suggested that certain legislation be enacted 
looking to the regulation o,f stock exchange practices, 
and discouraging the illegitimate traffic by fiduciaries 
in the shares of their own companies, by compelling 
the evidence of members of such exchanges under 



The Remedy 37 

heavy penalty, where reasonable proof of irregularity 
is submitted. 

The speed of the fleet is the speed of its slowest 
ship, and if the Courts are tardy in enforcing the laws 
enacted to protect stockholders, all other efforts will 
practically be in vain. 

If some of these remedies appear drastic it must be 
remembered that, to all appearance, the time is not far 
distant when the entire business of this great country 
will be intrusted to corporations, and there is nothing 
today of such importance in this country as that a firm 
and honest foundation could be laid for such organiza- 
tions. An assurance of confidence in our companies' 
organizations on the part of the public will double the 
country's business in a very short period, will prevent 
anything in the way of locking up of capital, and will 
give a liquid character to our currency which will mul- 
tiply its value manifold. On the contrary, if the lim- 
ited few who grow rich by their breach of fiduciary 
duties are allowed to continue in their present course, 
they will breed socialistic ideas, will clog every wheel in 
our commerce, and will put us at the mercy of great 
commercial rivals, who do not have to deal with dis- 
honest fiduciaries. 

Other remedies indicated herein may, on the other 
hand, at first glance seem inadequate to the gravity 
of the disease, but in actual practice in Great Britain, 
after a battle with promoters for nearly a half cen- 
tury, it has been found possible to so condition a 
prospectus that the company shall be honest in its or- 
ganization and worthy of public confidence, and the 
company honestly begun is in a fair way to attain 
permanent success. 



38 Our Financial Upheavals 

DECLINE IN BANK AND COMMERCIAL STOCKS. 

If, as is commonly supposed, the price of our lead- 
ing bank stocks fairly reflects the condition of public 
confidence — since banks are but the concrete manifes- 
tation of the condition of our trade — then there is a 
sinister significance in the fact that within the past 
two years the capital stock of twelve of the lead- 
ing banks and trust companies of New York City have- 
declined $60,000,000 in value, or an average of $5,- 
000,000 each. 

During the last period of crisis it is estimated that 
the prices of the stocks marketed on our exchanges fell 
between fifteen hundred millions and two thousand 
millions of dollars. This crisis has been termed a rich 
man's panic, but even assuming that to be the case, 
there can be no doubt that thousands of middle class 
investors were caught between the upper and nether 
mill-stones of that time, just as there can be no doubt 
that the entire upheaval was caused by the unsatisfac- 
tory condition of many of our most important cor- 
porations and the uncertainty engendered by it. 

The pride one would naturally feel in an exhibition 
of tensile strength on the part of our financial institu- 
tions which can stand such a strain without breaking, 
is very seriously modified when it is remembered how 
perfectly unnecessary it was to so impair a naturally 
vigorous constitution. In the same way would one de- 
plore the spectacle of some self-imposed sickness rav- 
aging a physique of extraordinary natural robustness. 
An injury which no foreign country, or, perhaps, com- 
bination of foreign countries, could have done us, this 
country has wantonly inflicted upon itself. 



IV. SUGGESTIONS. 



A SYNOPSIS. 

i. For Interstate and State corporations a Federal 
law and a State law respectively, the Federal organ- 
ization to be similar to that of national banks, and to 
have the word "National" incorporated in its title. 
While every practicable safeguard should be incorpo- 
rated in these laws, there should be no Government re- 
sponsibility or inspection. 

2. The safeguards to be embraced in the Articles 
of Incorporation by Congress, in the case of Federal 
corporations,and by the States in the case of the others, 
should include such as have been outlined in this paper, 
and no corporation should be organized and no capital 
invited after the organization without the issue and 
registration of a prospectus — which should contain full 
particulars for the information and guidance of the 
subscriber — and without the granting of a certificate 
authorizing the issue. Such information as is de- 
manded here, should include every material fact relat- 
ing to the purchase, contracts, intermediary profits, 
etc., and should supply certified valuations of property 
taken over, with evidence that the directors have taken 
precautions to ascertain that the valuers are competent 
authorities, on whose valuation reliance may be placed. 
Nothing of interest should remain undisclosed. 

3. At the meeting of such corporations full state- 



40 Our Financial Upheavals 

ment should be made with reference to the company's 
business and condition, and members of the Press 
should be invited to be present and to make, as in 
other countries, full reports of what transpires. 

4. The names and addresses of stockholders should 
be registered where they can be seen by members and 
the public, and where full copies can be obtained for 
a reasonable compensation, as is the case elsewhere. 

5. Directors and officers should be under oath not to- 
traffic in the shares of their companies, directly or in- 
directly, or to benefit by any transaction connected with 
the company. Any deviation from this rule sanctioned 
by the directors should be reported in detail in the 
company's minutes, which should be on hand at gen- 
eral meetings in case the question should be asked. 
All profits made by breach of this agreement to be 
forfeited to the corporation, and directors guilty of 
such breach to be summarily dismissed from office. 

6. To avoid the adverse action of the majority, 
to direct where necessary that the voting power shall 
be divided as in the case of certain English companies, 
in which, as already indicated, the proportion of votes 
decreases with the amount of the holdings. 

7. The practice o,f paying an excessive amount of 
stock to the vendor of a property to enable him to turn 
back a portion of that stock so that it can be" sold for 
the benefit of the company later on at a discount as 
treasury stock, will, of course, be prohibited by the 
rule compelling that full value shall be given by the 
vendor for any stock received by him in payment or 
part payment of his property, but in any event the 
custom should be prohibited, and there should be no> 



Suggestions 41 

evasion of the act forbidding the sale of stock at less 
than par. 

THE FULLEST PUBLICITY DESIRED. 

8. Every new company launched, or every new issue 
of stock or bonds should be accompanied by publicity 
in the fullest terms. If we cannot give to our varied 
securities the fixed value we give to our moneys, we 
can at least ear-mark them so that the investing public 
will know that one hundred dollars in actual cash has 
been paid for each one hundred dollar share, or that 
value to that amount, fixed by competent and inde- 
pendent valuers, has been given in exchange. No law 
can be made retroactive so as to injure the innocent 
holder, and if we would avoid a still worse condition 
of affairs than has existed in the past ,few weeks, we 
must confine our suggestions to the future. And these 
suggestions, it must be understood, cover all bonds or 
stocks whether issued direct to the public or through 
the medium of banking houses. The statement in the 
prospectus by an interested party, should not shift the 
responsibility of the house of issue. 

STATES ACTION CALLED FOR. 

Such remedies as are here merely indicated, should 
at once be taken up by the different states, and if they 
secure the President's approval, and his recommenda- 
tion of favorable Congressional action at the next ses- 
sion, a reaction will promptly set in which will be 
healthful and beneficial, and the wound to our country's 
commerce and finances will close from the bottom in a 



42 Our Financial Upheavals 

natural way. If some such action is not taken, the 
great prosperity of the country will probably gloss 
over the present condition temporarily, but only to be 
opened up much more violently later on. Any laws en- 
acted must clearly define how Interstate and State cor- 
porations are to be incorporated and managed. Let this 
be done with great clearness and detail, and let the 
stockholder be clothed with ample powers to protect 
his own interests at all points, so that the cure of our 
existing evils may be automatic. Encourage the full- 
est publicity in the organization and conduct of cor- 
porations, for in that, more than anything else, as a 
moulder of public opinion and an encouragement of 
fiduciary honesty, will the most successful remedy be 
found. Last, but not least, give to the public courts 
which will be swift to see that proper effect is given 
to these laws. 

The man who accomplishes the work of putting our 
corporations on a sound basis, will have done what it 
has taken all the best legal talent of England half a 
century to accomplish, and the benefit he will have 
conferred on his country, will be such as will not 
be computable in any sum which our intelligence can 
grasp. He will have stricken the shackles from our 
commerce and finances, and his work will insure a 
prosperity in the near future such as even this country 
has never seen. 



Suggestions 43 

RAILROAD VALUATION BY GOVERNMENT OR STATES 
DISAPPROVED. 

This article would not be complete without some 
reference to the proposition that the Government, or 
the different States, should undertake the valuation of 
our railroads. This, it may be pointed out, would be 
a costly task with but little prospect of a tangible result 
to recommend it beyond the hurtful depreciation of our 
securities, both while the investigation was pending 
and after it was completed. 

If a glaring discrepancy were laid bare between cost 
and capitalization, the question would be, can the 
money be got back from those who benefited by it? 
If this cannot positively be done, the interests of the 
present innocent holder of securities would be need- 
lessly sacrificed by their depreciation. 

Great Britain, as indicated, has always paid for her 
railroad stocks on the basis of one hundred cents on 
the dollar, but it has largely been her custom to charge 
up to capital account many renewals and improvements 
which are ordinarily charged against revenue in this 
country, and it may be doubted whether a valuation of 
British railroads today where there is little of that 
elastic growth which there is in this country to rec- 
tify early errors or irregularities, would show a better 
relationship between cost and capitalization than many 
of our domestic railroads. Would any sane man pro- 
pose to England that she should value her railroads 
today with a view to readjusting their capital? 

A railroad insofar resembles a manufacturing plant 
that its actual cost — except for the satisfaction of find- 



44 Our Financial Upheavals 

ing out where the money has gone, is of but little 
importance compared with the really vital question of 
the roads' sustained earning capacity. Unless this is 
satisfactorily established, the property and plant, 
whatever their cost, are practically valueless. 

Of far more importance than the valuation of a rail- 
road based on its cost in the past, or even on the cost 
of replacing it, would be an absolutely reliable state- 
ment ( i ) of its physical condition, in order to deter- 
mine whether the existing property and equipment are 
respectively so wisely located and so sufficient as to 
insure a profitable return on a given capital and bonded 
debt, and (2) of the probable outlay necessary to main- 
tain it in a maximum condition of efficiency to do its 
work at a minimum cost for running expenses, so that 
it may preserve and increase its earning power. 

CORPORATIONS SHOULD CAUSE VALUATION TO BE 
MADE ON OCCASION OF FRESH ISSUES. 

For the Government or the States to value the rail- 
roads of the country, would be, as stated, the assuming 
of a grave and undesirable responsibility. If exam- 
inations are necessary — and the writer thinks they 
are — for the purpose of showing the road's condition 
and earning capacity, but not of determining their 
cost, let the railroad companies in their applications 
for fresh loans, or in placing fresh capital, furnish a 
full report on their properties by independent experts, 
engineers and auditors of national reputation, who, 
like army engineers should be beyond suspicion, and 
if this is not deemed sufficient, then let the Govern- 



Suggestions 45 

ment appoint the experts, without responsibility as to 
their findings. There is no difficulty in carrying out 
this plan once it is decided upon. There are plenty 
honest experts in the country for all requirements. 

If, instead of adopting some such plan of action as 
is here suggested, the Government of the United 
States, or the different states, begin an investigation 
to determine the actual value of our railroads based 
on the cost of duplicating them, it is not difficult to 
imagine what the result will be. First of all, it will 
entail a period of disquiet which will render the bor- 
rowing of further capital for our railroads an impos- 
sibility, and will keep the country on the ragged edge 
of a crisis for an indefinite period; and in the second 
place, it will give, not only to our own investors, but 
to the investors of every great country in Europe a 
sense of distrust of our methods which will not be got 
over in the life time of any man now of middle age. 

At this point the writer makes bold to quote a sen- 
tence from an article from his pen entitled "The Fruits 
of Fraudulent Railroad Management," which ap- 
peared in the Engineering Magazine o,f New York 
City eleven years ago at a time when the methods of 
certain of our railroad officials were under the same 
severe condemnation from which they suffer now : 

"In the case of municipal mismanagement and 
corruption, a country's 'dirty linen' may be 
washed at home and the world at large not be 
made unpleasantly aware of the process or of the 
need therefor. In the improper handling of its 
finances, however, that is of securities which have 
an international importance, its 'dirty linen' is 



46 Our Financial Upheavals 

washed in the thronging centers of every great 
monetary nation, to the mortification, discredit, 
and loss of the country of issue." 

The same may be said today. 

THE COUNTRY'S TWO DANGERS; A MIDDLE COURSE. 

The country, therefore, stands exposed to two dan- 
gers : In the first place, that its abounding prosperity 
cause the people to forget the recent crisis and what 
led up to it, thereby necessitating a reopening of the 
question later on, and under less favorable conditions; 
and, in the next place — if our railroads are submitted 
to Federal or State valuation — the danger of a crisis 
and of permanent injury being done to our railroad 
finances, as well as to the reputation of the country at 
large. 

In this article the writer has endeavored to indicate 
a middle course, which if promptly adopted, will tend 
to the restoration of confidence in our railroad proper- 
ties and general corporate enterprises, and that with- 
out dragging the good name of the United States in 
the dust. 



LIBRARY OF CONGRESS 



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